Los Angeles Times: Through grants, small tech firms put government tax dollars to work

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By Cyndia Zwahlen for the Los Angeles Times

May 2, 2011

M4 Engineering Inc., a small company in Long Beach, has figured out how to use tax dollars to prosper.

Not its tax dollars. The company — which provides structural analysis, consulting and software development for aerospace firms — has leveraged a string of federal research grants into products and services it sells to clients.

It has even spun off a small company, Modular Wind Energy Inc. of Huntington Beach, which uses M4’s federally funded research to develop lighter and cheaper blades for wind turbines.

“What we have tried to do is take that money from the government and, sure, do good research for the problem the government is interested in, but also try to turn that into something much bigger, said Kevin Roughen, M4’s vice president.

M4, which has 20 employees, was started with the help of a federal grant in 2001.

Turning research into commercial products is a main goal of the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. The federal programs spend about $2 billion a year on grants and contracts for scientific research and development.

SBIR was established by law in 1982 to fund high-tech research at small businesses. STTR, a smaller program that requires a university research partner, began in 1992.

California typically wins the largest chunk of money from the programs. Small businesses in the state won $402 million through 1,230 grants and contracts awarded in the government’s fiscal 2009, according to the Small Business Administration’s Technology Resources Network.

Auritec Pharmaceuticals Inc. in Santa Monica said that without grants, it wouldn’t have been able to fund data collection for the drug delivery method it developed.

“We are starting to talk to big pharmaceutical companies about licensing our products,” said Amanda Malone, vice president of Auritec, which has 15 employees. “If we didn’t have that data, I don’t think anybody would be talking to us, and you can’t get that kind of data without money.”

But the future of SBIR and STTR is uncertain. Not formally reauthorized by Congress for several years, they’ve been limping along on extensions.

“It is nerve-racking,” said Rick Shie, senior vice president of Physical Optics Corp. in Torrance, a frequent SBIR grant winner that develops and makes optical electronics for military and commercial use. Started 25 years ago under an SBIR grant, the firm now employs 180 people and has spun off six other companies.

Part of the holdup in reauthorization is because of a battle over how much of the funds can go to venture capital-backed businesses. A House version of a funding bill would allow 35% to 45% of SBIR awards to go to businesses that are majority-owned by venture capitalists. The Senate version allows 15% to 25%.

Although most of the individual grants are relatively small — starting at about $150,000 for so-called Phase I awards — companies can apply for more than one at a time. Phase II awards, which are harder to get, can reach about $1 million.

Not all businesses have been happy with the programs. A frequently heard complaint is that the grant process takes too long.

Also, there have been concerns about the potential for fraud — an SBIR program overseen byNASA was found, in an internal review, to not have “appropriate internal controls.” The review found that this left the door open to grant recipients receiving multiple awards for the same research, or making claims for costs that were not allowed.

The SBA is working on a set of initiatives to try to fix some of the security shortcomings.

At their best, the programs provide small businesses with the chance to work on high-risk research that can produce big rewards.

“We own our own soul, and that’s the point, because of SBIR you don’t have to sell your soul” to outside investors, Shie said. “And you can retain your technology.”